Effortless Wealth Building: A Beginner’s Guide to Index Funds

By: Daksh Chansouriya | 13 June, 2024

Understanding Index Funds for Beginners What is a Stock Market Index? A stock market index is a theoretical portfolio representing the overall financial market. The two biggest stock exchanges in India—the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE)—have about 5,000 and 2,000 companies listed respectively. It’s practically impossible to track the movement of each stock and then calculate the market movement. That's where an index comes into play.

An index is created by selecting specific sectors and their weights, then picking companies from each sector and assigning weights to each company based on various factors. For example, the SENSEX is an index created by BSE and includes a basket of 30 stocks from different industries. The change in the SENSEX reflects the price changes of these underlying stocks and is used as a representation of overall market movement.

What is an Index Fund?

Index funds are mutual funds that invest your money in the same companies and in the same proportion as the index they track. These funds aim to replicate the performance of the chosen index, offering investors a way to gain exposure to the broader market with a single investment.

How Do Index Funds Work?

Index funds operate similarly to other mutual funds by pooling investors' money to invest in a diversified portfolio of stocks. However, their investment strategy sets them apart. While fund managers of actively managed funds conduct extensive research to find stocks and build a unique portfolio aiming for superior returns, index funds follow a passive management approach.

The Role of the Fund Manager

In index funds, the fund manager simply allocates the money to stocks that are part of the index in the same proportion as the index. Unlike actively managed funds, where managers regularly tweak the portfolio by buying and selling stocks, index funds only make changes when a stock is added or removed from the index. For example, an HDFC SENSEX Fund will buy all 30 stocks that are part of the SENSEX in the same proportion. Whenever a stock is removed from the index and a new one is added, the fund will replicate the change in its portfolio.

Benefits of Index Funds

Investing in index funds comes with several advantages:

Prominent Examples of Index Funds

Here are some examples of successful index funds in India:


In an investment world filled with complexity and uncertainty, index funds offer a light of simplicity, cost-efficiency, and long-term performance. Whether you’re a knowledgeable investor looking to organize your portfolio or a beginner taking your first steps into investing, index funds provide a reliable foundation for building wealth over time. By harnessing the power of the market and embracing a passive investment approach, investors can navigate their investment journey with confidence, knowing that their financial future is in capable hands.

Additional Resources for Beginners

For those new to investing, here are a few steps to get started with index funds:

Final Thoughts

Index funds represent a powerful tool for investors seeking a simple, cost-effective, and reliable way to build wealth over time. By understanding how index funds work and the benefits they offer, beginners can make informed decisions and embark on a path to financial growth and stability.


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